The Construction Industry Scheme (CIS) is an HMRC scheme to help manage contractor and subcontractor tax. It ensures that tax is deducted at source from payments to subcontractors where applicable.
CIS applies to self-employed contractors who work in construction. Under CIS, HMRC treats a percentage of payments as tax and holds them back to help manage taxes for construction workers.
What Is the Purpose of CIS?
Reduces Fraud and Tax Evasion
CIS helps to reduce the risk of fraud and tax evasion in the construction industry. It does this by creating a system where tax is taken, if applicable, at the point of payment rather than being declared at year-end or month-end.
The system is automated to an extent and works in a similar way to PAYE, although it uses a fixed percentage system rather than a tailored system. HMRC uses CIS to act more quickly against potential fraud and reduce the tax losses experienced by HMRC.
The current iteration of CIS, introduced in 2007, uses a registration system to manage contractors and subcontractors. It uses CIS payments as a credit against a subcontractor’s National Insurance and other tax liabilities.
Spreads Tax Liabilities Over the Financial Year
Traditionally, self-employed workers pay tax as a lump sum yearly or, in some cases, on account payments are also made during the tax year. CIS helps to spread the tax burden over the financial year with monthly payments.
Contractors submit a monthly CIS return to advise HMRC of the payments made to each subcontractor. They then have 14 days to the end of the tax month to make the final payment of the monthly withheld money to HMRC.
How Does CIS Work?
CIS works through a contractor and subcontractor system. When a contractor pays a subcontractor, they deduct 20% of the total labour costs if the subcontractor is CIS registered or 30% if the subcontractor isn’t, unless the subcontractor has a status of ‘gross’. This deduction is withheld and paid monthly to HMRC.
Similar to a payslip, contractors are required to send subcontractors, aside from those with gross status, a statement showing deductions and final payments made through CIS.
Once the payment is received, it is used as a credit against the subcontractor’s year-end tax payments. As many subcontractors end up being in credit, they will often be able to receive a tax rebate from HMRC.
Housebuilders Hampshire Ltd employ a subcontractor, Claire, who is a self-employed bricklayer. At the end of the month, she bills Housebuilders Hampshire Ltd an invoice for her labour at £200 a day. As materials were provided, she has no additional costs.
Claire worked 15 days that month, accumulating a net income of £3,000. Claire is CIS registered, so Housebuilders Hampshire deducted 20% (£600). The total monthly payment to Claire was £2,400 that month.
Who Has to Register for CIS?
A contractor is someone who employs others to do building work. It is compulsory to register for CIS as a contractor if you fall under the scope of the scheme. There are two main categories:
- Mainstream contractors – businesses including construction companies, property developers, speculative builders (those who ‘flip’ properties for profit), gang leaders who organise construction workers and foreign businesses that organise the construction within the UK and territorial waters (up to a 12-mile limit).
- Deemed contractors – non-construction businesses (like large manufacturers, breweries, big department stores, banks, oil companies and property investors) and public bodies such as government departments and local authorities that spend £3 million or more on construction operations in a 12-month rolling period.
Homeowners and non-construction businesses that do not spend more than £3 million on construction in the 12 months since the first payment are not defined as contractors under CIS.
A subcontractor is anyone who does work for a contractor. Due to the nature of the construction industry, a contractor could be a subcontractor and vice versa. It’s not compulsory for a subcontractor to register under CIS, but if they don’t, the amount withheld increases from 20% to 30%.
According to the government website, the following could be defined as subcontractors:
- Companies, corporate bodies and public bodies, as well as any self-employed individual running a business or partnership
- Labour agencies and staff bureaux that subcontract their workforce
- Foreign businesses being paid for construction operations that take place in the UK or its territorial waters (up to the 12-mile limit)
- Gang leaders who agree with a contractor on the work to be done and receive payment for the work of their gang
- Local authorities and other public bodies who carry out construction operations for someone else.
It’s worth noting that employees cannot be subcontractors under CIS. If a person’s work is wholly done for one company, they should be registered as an employee.
What Work Is Covered By CIS?
Most commercial construction work is covered by CIS – examples include:
- Building work
- Demolition and dismantling
- Installation of heating, lighting, power, water and ventilation
- Site preparation.
Private homeowners having work done on their homes do not count. However, if they hire a construction company to carry out alterations, that work will fall under CIS.
Work on a construction site that’s not related to actual construction work – such as security, facility management or canteens – does not fall under CIS.
Registering for CIS as Contractor
Contractors need to register for CIS when they are about to take on and pay their first subcontractor. The process for registering as a contractor is the same as that for an employer, so you can register for both PAYE and CIS at the same time.
Registering for CIS as a Subcontractor
Subcontractors either need to be registered as a sole trader or a business because the UTR (Unique Tax Reference) is a CIS requirement. Once you have your UTR, make sure you register as a subcontractor online.
RedSky ERP for Construction: CIS Accounting Made Easy
With RedSky’s construction ERP software, you can submit your CIS monthly returns to HMRC quickly and easily; manage subcontractors through our subcontractor ledger and have instant access to real-time reports and financials as well as forecasts. We make managing subcontractors under CIS simple.